20 December 2011

Startup Ecosystem To Face Realism Rather Than Optimism In 2012

Due to the economic realities that the Venture Capitalists and the CEOs are going to face in 2012, the startup ecosystem and the venture capitalists are abound to face realism rather than optimism in 2012, reports the results from this year’s Venture View predictions survey conducted by the National Venture Capital Association (NVCA) and Dow Jones VentureSource. Dow Jones VentureSource database tracks the activity of private investment firms and venture-backed companies in all industries and stages of development, worldwide.

When compared to last year’s survey, forecasts from venture capital professionals and venture-backed CEOs are less confident and more measured for the coming year, with few notable bright spots. With all the concerns, the enthusiasm still awaits for the IT investment, particularly on the consumer side. Also, the focus will be on the startup company momentum, especially job growth. Yet, it is predicted that in critical areas such as IPOs and venture fundraising are moderate at best, reflecting ongoing, unavoidable challenges faced by VCs and entrepreneurs alike.

“Due to large number of market and political factors at play, it is incredibly difficult to predict the state of the venture capital ecosystem in 2012. Despite the fact that VC and entrepreneurs are well positioned to thrive, externalities are keeping optimism at bay. There are couple of public policy issues poised to impact the startup community that can offset the positives such as an improving IPO pipeline and opportunities for FDA and capital markets reform and these are to be blamed for the less sanguine predictions this year,” said Mark Heesen, President of the NVCA. However, the VCs and entrepreneurs forecast a number of positives including valuations, headcount and global activity amidst the realities that face the industry.

The survey reports that the CEOs are more optimistic that the VCs on investment levels with overall 45 percent predicting increase in 2012 compared to 32 percent of VCs who expect to see investment levels rise. 36 percent of VCs see overall investment levels decreasing compared to 25 percent of CEOs. Most VCs predict investment increases in consumer IT (64 percent of respondent), healthcare IT (61 percent of respondent) and business IT (50 percent of respondent). About 73 percent of all respondents expect investment froth in consumer IT. On the flip side, 58 percent of VC industry respondents expect investment decreases in the biopharmaceutical and medical device sectors and 55 percent expect investment levels to decline in clean technology companies.

“We can expect a competitive environment for capital on both sides of the venture business in 2012. With nearly three-quarters of VCs predicting limited partners will commit the same amount or less to the industry and about the same proportion of CEOs expecting to raise money, financings could get tighter with some companies left to survive on their own,” said Jessica Canning, Global Research Director, Dow Jones VentureSource.

Where 58 percent of VCs predict a slowdown in seed and early stage funding, still 75 percent of the CEOs plan to raise money in the coming year. The VCs are less bullish on the 2012 IPO market with 48 percent forecasting increases in overall volume compared to 67 percent last year. Only 16 percent of the venture-backed CEOs plan to cash out their personal equity in 2012 and just 6 percent plan to sell secondary shares. 53 percent of the CEOs are optimistic about the U.S. economy compared to 47 percent of VCs.

50 percent of the respondent VCs will invest out of the U.S. next year with China and Western Europe beng the most cited global region at 19 percent each. Also, the expectations of venture capitalists and CEOs regarding deal structure are converging with 53 percent of VCs and 56 percent of CEOs believing that financing terms will favor VCs over entrepreneurs in term sheet language.

The companies backed by VCs are going to get a great deal of social media support in 2012 as 58 percent of VC respondents expect to use social media channels to promote their portfolio companies and 56 percent intend to promote their firms in this way. It is also reported that VC-backed CEOs are more active in social media than their VC counterpart.